On Tuesday, Arkansas Governor Mike Beebe (D.) announced that he had reached a deal with HHS Secretary Kathleen Sebelius to participate in Obamacare’s expansion of Medicaid, but with an important twist: the eligible population would be placed into the Obamacare exchanges, instead of Medicaid. This means that poor Arkansans will get higher-quality, but costlier, coverage than they would have been forced to accept in the traditional Medicaid program.

It’s a deal that hadn’t been on offer to other states considering the Medicaid expansion. HHS’s prior position had been that states had to expand the traditional Medicaid program, or get nothing. The reason for this is that coverage on the exchanges costs about $9,000 per person per year, compared to $6,000 on Medicaid, and Obamacare is intentionally delivering half of its coverage expansion through the Medicaid program, because doing so reduced the fiscal cost of the bill.

Leaving the fiscal question aside, it’s encouraging from a policy standpoint that HHS appears willing to give states the flexibility to place their Medicaid population on the exchanges. Obamacare’s exchanges have many flaws; in particular, the exchanges are laden with costly mandates and regulations that make their insurance products unnecessarily expensive. But they are still better than the traditional Medicaid program, because the exchanges use private-sector insurance, premium support, and individual choice.

Politico is reporting that Ohio has also approached HHS about an Arkansas-style deal. Other states are sure to follow. But this approach will cost more money, at least initially. I’m not sure that HHS has the statutory authority to allocate more money to states in this manner. Either way, Congress will need to offset this additional spending somehow—ideally by raising Medicare’s retirement age.